Archive for the ‘Deflation / Inflation’ Category

When everyone thinks the same way, everyone is likely to be wrong.         The Art of Contrary Thinking – Humphrey Neill

Everyone thinks that we are going into hyper-inflation.  I have argued that deflation is more of a problem than anything else.  Debt is a deflation problem, not an inflation problem.

Unfortunately, time is the only thing that cures a debt crisis.  You just don’t have the elements that create inflation.  People are not going to all of the sudden start buying things and circulating printed money.  All of that money that is being printed will be absorbed by debt and losses. 

Scott Burns wrote a good piece the other day about his discussion with Lacy Hunt.  It is a good hysterical perspective on deflation.  Ironically, he talks about Irving Fisher in the article and refers to him as the greatest American economist.  Irving Fisher was the same guy who argued repeatedly that there would be no depression or stock market crash prior to the Dow Jones Industrial Average losing -86% between 1929 and 1933.  Most of his work on deflation was written in 1933 with the Great Depression as the backdrop.   

The difference between the Great Depression and today is that the Government has been more proactive in solving the debt problem.  The similarity is that both situations (1929 and today) were created as a result of a debt crisis.

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I typically post in the morning and write about the prior day’s market action in addition to the morning economic news.  I am writing this Tuesday night because I am speaking at a conference in Fort Worth Wednesday morning, which will fill most of my morning.


So, Wednesday we will get another look at inflation numbers with the Consumer Price Index report.  Tuesday we saw the Producer Price Report numbers.  I wrote about them in my blog.  The Consumer Price Index tells what is happening to prices (rising or falling) at the consumer level.  It will be interesting to see if the CPI numbers look as deflationary as the Producers Price Report.


Tuesday, it wasn’t a very pretty day on Wall Street.  The big questions are:


–  Is this the start of a new bull market and the bear market is over? 

–  Is this just a bear market rally?

–  If it is a bear market rally, when will it be done and how bad will the next part of the bear market be for investors?


Daily price levels give us clues about the future direction of the market.  Remember price levels are like road markers.  They tell us if we are headed in the right direction or not.   My opinion is that we are in a bear market rally and this bear market rally is nearing the end.


We are always looking at the CLOSING price level of the S&P 500.  Tuesday the S&P 500 closed on an important price level of 841.  It will be interesting to see what happens from here.  We might be getting ready to go down to 800 and “test” that price level.  If the market can stay above that level, that would be a positive sign.  If not, look out below.  We will have to wait to see what Wednesday brings.



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As I was driving into work this morning, I was listening to the latest economic reports on CNBC (financial news television via satellite).  The latest report on producer prices showed the greatest year over year decline since 1950.  One announcer proclaimed that this was good news, that inflation is not a problem.  Well, that is good news that inflation is not a problem.  With the Government printing money as fast as it can, huge inflationary concerns should be in the back of everyone’s mind.  However, there is equally bad news in that these numbers are showing that deflation is a real problem. 

I have argued all along that deflation is our biggest battle right now.   If we were facing inflation, prices would be rising.  Remember when gas prices were over $4 last year?  That was definitely inflation.  The exact opposite is true of deflation.  In a deflationary recession, the economy is not growing and prices of everything are falling.  The producer price index is an economic report that shows the prices at the producer level (before it gets to the consumer) either rising or falling.  Thus far, businesses are unable to raise prices.

The biggest concern with deflation is how tough it is to eliminate.  Deflation is a lot like cancer.  Once a person gets cancer, it is tough to get rid of it.  Japan suffered through deflation for over a decade.  We also saw severe deflation during the 1930’s.   So, falling prices and lack of inflation is not good news.  I would prefer to see prices rising. 

Deflation is typically brought on by a debt crisis.  All of the symptoms and characteristics are present today.  This is also why I believe that gold has fallen over the past few months to below $900 an ounce.   I think that all of the gold and inflation talk is very premature. 

As far as the markets…they continue to march upwards.  They are showing some weakness this morning, which is to be expected following such a strong showing over the last 5 weeks.  What happens when this market faces some weakness will be telling of the overall strength of this recent bear market rally.  My indicators are showing that this bear market rally is close to being over.

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I appreciate your helpfulness & knowledge. I find it puzzling that you don’t put more emphasis on hard assets in this environment. Check out the Tocqueville funds 4 portfolios from Jan first & compare! Also, gold has been a winner each year for the last 8 to 9 years & was the only asset class to post positive returns last year!

I realize that  Gold Bugs will strongly disagree with my opinion.  Hard assets are a good investment.  However, ultimately not in this environment.  As deflation continues to set in, gold will have a tough time continuing too appreciate. Gold does not historically do well in deflationary environments.  So, I see a few scenarios for gold.  First, Gold could go on a rampage for a few months and then go through a sell off like oil did last year or Gold could top here around 1000 (putting in a double top) and then start a decline over the balance of the year. 
However, longer-term we have a major inflation problem to deal with and I think that gold will be a great investment.  There is a little to much hype right now (much like oil last year) that indicates to me that we are seeing somewhat of a bubble atmosphere.  If gold does take off from here, I really do feel that we will see a similiar situation as oil.  When something seems like a slamdunk and every other commercial on cable tv is peddling gold, then there is a red flag.
Here is a good article on gold and deflation – http://www.elliottwave.com/deflation-gold-relationship.aspx
Actually hard assets wasn’t the only asset class to do well last year.  Bear market mutual funds did incredible last year.  This is an asset class that doesn’t get much press.
Keep the Faith

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